Actuarial valuation of the benefit system NZSA Conference 2012

Transcription

1 Actuarial valuation of the benefit system NZSA Conference November 2012

2 Agenda 1) Context: Welfare Reform 2) The Valuation Approach 3) Results: Summary 4) Delivering the IA 5) Results: Detail Taylor Fry Pty Ltd 2

3 1) CONTEXT: WELFARE REFORM Taylor Fry Pty Ltd 3

4 Why reform welfare? 18% Proportion of Working Age on Benefit % 14% 12% 10% Unemployment Benefit 8% Invalid's Benefit 6% 4% Sickness Benefit 2% Domestic Purposes Benefit 0% Taylor Fry Pty Ltd 4

5 Welfare reform a top priority for government "the scale and consequences of long-term benefit receipt are deeply concerning... [welfare] is not sustainable, it does not provide equal and fair opportunities for those people on different benefit types and it is associated with poor social outcomes. Welfare Working Group Key Recommendations from Welfare Working Group: Up-front investment to reduce benefit dependency Annual valuations to make long-term costs of the benefit system transparent Accountabilities linked to managing long-term cost Key Government decisions: Investment approach at core of the reformed benefit system Intervene early with groups, individuals otherwise on benefits long term New accountability arrangements: Work & Income Board, valuations Taylor Fry Pty Ltd 5

6 An investment approach to welfare Why? To understand impacts of policy, operational and behavioural change To gain complete understanding of cost of social welfare system To enable change How? Provides long term perspective of lifetime costs of the benefit system Comparisons enable analysis of change to determine key risks Can be used to determine impacts of reforms (past & future) Key drivers of liability can be understood in detail Taylor Fry s involvement: Nov 2011: Feasibility of an actuarial approach for managing the benefit system Aug 2012: undertaking baseline actuarial valuation Taylor Fry Pty Ltd 6

7 Investment Approach Level I: Valuation of social welfare system Modify valuation Actuarial valuation Valuation undertaken annually by external actuaries Incorporate macroeconomic trends, policy changes, trends in experience and financial impact of level III initiatives Monitor experience Forecasts of future experience Level II: Segment lifetime costs Modify estimates & forecasts Segment liability estimates and KPI s Classify clients into segments to tailor interventions and monitor outcomes Used to set targets for performance monitoring Monitor experience Forecasts of future experience Level III: Client & cohort level initiatives Expand or cancel initiative Monitor experience Isolate problem Evaluate impact of initiatives on client outcomes Translate financial impact of initiatives to estimates of segment liability Taylor Fry Pty Ltd 7 Evidence based decision Evaluate trial Carry out trial Design trial Develop tactical response

8 Wider context Idea whose time has come Australian Productivity Commission s proposals for the National Disability Insurance Scheme International Public Sector Accounting Standards Board Reporting Board Other countries Wider public policy implications Challenges Changing the way agencies intervene Implications for other sectors Taylor Fry Pty Ltd 8

9 2) THE VALUATION APPROACH Taylor Fry Pty Ltd 9

10 Comparison to traditional valuation No definition of liability Importance of cohort and single client view Complex behaviour of clients in benefit system vs. claimants Importance of multiple time measures Duration on current spell of benefits History of other benefit spells Age Report released publicly on MSD s website: Taylor Fry Pty Ltd 10

11 Year 1 Year 2 Year 3 Year 4 Year 5 Definition of liability MSD Benefits MSD cost of income support administration Past client, paid benefit within 12 months prior to valuation date Current clients at 30 June 2011 Future clients MSD cost of work-focussed investments Current client liability: life-time costs of current clients Future client liability: lifetime costs of future clients Taylor Fry Pty Ltd 11

12 Valuation Components Key Tier 1 benefits Other Tier 1 benefits Tier 2 benefits Tier 3 benefits Unemployment Benefit & related (inc Independent Youth Benefit) Sickness Benefit & related Segmented by age to track youth etc Domestic Purposes Benefit (inc Emergency Maintenance Allowance) + Invalid s Benefit Woman Alone / Widow s Benefit Orphan s / Unsupported Child DPB-Carer Emergency Benefit Accommodation Supplement Disability Allowance Child Disability Allowance Recoverable Hardship Assistance Net loans cost Work-focussed investments Income support administration Childcare Subsidy Employment Interventions Taylor Fry Pty Ltd 12

13 Valuation Components Key Tier 1 benefits Other Tier 1 benefits Tier 2 benefits Tier 3 benefits Unemployment Benefit & related (inc Independent Youth Benefit) Sickness Benefit & related Segmented by age to track youth etc Domestic Purposes Benefit (inc Emergency Maintenance Allowance) + Invalid s Benefit Woman Alone / Widow s Benefit Orphan s / Unsupported Child DPB-Carer Emergency Benefit Accommodation Supplement Disability Allowance Child Disability Allowance Recoverable Hardship Assistance Net loans cost Work-focussed investments Income support administration Childcare Subsidy Employment Interventions Taylor Fry Pty Ltd 13

14 Basic structure of models Key Tier 1 benefits Unemployment Benefit & related (inc Independent Youth Benefit) Sickness Benefit & related Segmented by age to track youth etc Domestic Purposes Benefit (inc Emergency Maintenance Allowance) Invalid s Benefit NOB OTH Modelled as universe of clients Transitions between these 4 benefits states and OTH (on any other benefit*) and NOB (Not on benefit) Models of transitions => forecast of numbers on each benefit type DPB UEB INV Average benefit payment (ABP) models for each benefit type SIC Forecast payments = forecast number on benefit type xyz x average benefit payment for benefit type xyz Taylor Fry Pty Ltd 14 * OTH = any other benefit excluding CCS & Tier 3

15 DPB Model detail: Key Tier 1 NOB OTH INV SIC Example: UB transition models for number of clients UEB # UB at beginning of Qtr Binomial GLM* Pr(Remaining in UB) Binomial GLM Pr(NOB, given not in UB) Multinomial GLM Pr(IB/OTH/ SB/DPB, given not NOB, UB) # UB at end of Qtr (# UB UB) # UB NOB # UB IB # UB OTH # UB SB # UB DPB *GLM = Generalised Linear Model Taylor Fry Pty Ltd 15

16 Valuation Components Key Tier 1 benefits Other Tier 1 benefits Tier 2 benefits Tier 3 benefits Unemployment Benefit & related (inc Independent Youth Benefit) Sickness Benefit & related Segmented by age to track youth etc Domestic Purposes Benefit (inc Emergency Maintenance Allowance) + Invalid s Benefit Woman Alone / Widow s Benefit Orphan s / Unsupported Child DPB-Carer Emergency Benefit Accommodation Supplement Disability Allowance Child Disability Allowance Recoverable Hardship Assistance Net loans cost Work-focussed investments Income support administration Childcare Subsidy Employment Interventions Taylor Fry Pty Ltd 16

17 Basic structure of models Tier 2 Accommodation ( AS ) and Disability ( DA) related benefit payments where there is also a Key Tier 1 benefit payment are modelled separately from other Tier 2 benefits. Average benefit payment model for each Key Tier 1 benefit type separately for AS and DA. Tier 2 benefits Accommodation Supplement Disability Allowance With Key Tier 1 benefit Forecast payments = forecast number on Key Tier 1 benefit type xyz x average benefit for AS and DA Taylor Fry Pty Ltd 17

18 Valuation Components Key Tier 1 benefits Other Tier 1 benefits Tier 2 benefits Tier 3 benefits Unemployment Benefit & related (inc Independent Youth Benefit) Sickness Benefit & related Segmented by age to track youth etc Domestic Purposes Benefit (inc Emergency Maintenance Allowance) + Invalid s Benefit Woman Alone / Widow s Benefit Orphan s / Unsupported Child DPB-Carer Emergency Benefit Accommodation Supplement Disability Allowance Child Disability Allowance Recoverable Hardship Assistance Net loans cost Work-focussed investments Income support administration Childcare Subsidy Employment Interventions Taylor Fry Pty Ltd 18

19 Basic structure of models Each of these benefit types modelled independently Model for each benefit type of probability on that benefit given in the current liability group at valuation date Also average benefit payment models Extra model for childcare subsidy as those on CCS only not considered in system Other Tier 1 benefits Woman Alone / Widow s Benefit Orphan s / Unsupported Child DPB-Carer Emergency Benefit Tier 2 benefits Accommodation Supplement Disability Allowance Child Disability Allowance Childcare Subsidy Tier 3 benefits Recoverable Hardship Assistance Without Key Tier 1 benefit Employment Interventions Forecast payments = Number in system x Probability in receipt of benefit type xyz x average benefit for each benefit type Taylor Fry Pty Ltd 19

20 Valuation Components Key Tier 1 benefits Other Tier 1 benefits Tier 2 benefits Tier 3 benefits Unemployment Benefit & related (inc Independent Youth Benefit) Sickness Benefit & related Segmented by age to track youth etc Domestic Purposes Benefit (inc Emergency Maintenance Allowance) + Invalid s Benefit Woman Alone / Widow s Benefit Orphan s / Unsupported Child DPB-Carer Emergency Benefit Accommodation Supplement Disability Allowance Child Disability Allowance Recoverable Hardship Assistance Net loans cost Work-focussed investments Income support administration Childcare Subsidy Employment Interventions Taylor Fry Pty Ltd 20

21 Projection: Process UB, dur 5, age 20.5, Jun clients Run through probability models UB, dur 6, age 20.75, Sep clients NOB, dur 1, age 20.75, Sep clients SB, dur 1, age 20.75, Sep clients ABP models $16.9k in payments $1.1k in payments UB, dur 6, age 20.5, Jun clients DPB, dur 1, age 20.75, Sep clients OTH, dur 1, age 20.75, Sep clients $1.2k in payments IB, dur 1, age 20.75, Sep clients $0.0k in payments Cells ready for next quarter projection Cashflows output Taylor Fry Pty Ltd 21

22 Projection: Comments The projection code is very powerful Run on specific cohorts Can test impact of different models; includes modifications to test individual components. Can easily allow for the future liability calculations This projection code can be extended to form the basis for estimating individual client estimates as part of the Level II framework Key drivers are of liability are: Age Duration on benefit Benefit quarter (as proxy for policy, operational, behavioural effects) History of other benefits Unemployment rate, no. & age children Taylor Fry Pty Ltd 22

23 Projection: Economic assumptions The projection uses forecasts of inflation and discount rates (for determining inflated and discounted liability value) and forecast unemployment rates (as a predictor in many of the models) Inflation and discounting taken from Crown account assumptions (3% to 2.5% CPI and 3% to 6% discount rates) Unemployment rate estimates provided by Treasury a gentle trend down from 6.5% to 4.7% All these assumptions have a highly material impact on results. Taylor Fry Pty Ltd 23

24 3) RESULTS: SUMMARY Taylor Fry Pty Ltd 24

25 Life-time costs of current clients (i.e. who received a benefit in 2010/11) $78.1B Taylor Fry Pty Ltd 25

26 Current liability by component Component Inflated and discounted liability ($b) Tier 1: Domestic Purposes Benefit Invalid s Benefit Sickness Benefit 7.22 Unemployment Benefit 4.04 DPB-Care of the sick and infirm 1.78 Emergency Benefit 0.32 Orphans and unsupported children 2.06 Woman Alone / Widows Benefit 0.94 Tier 1 subtotal Tier 2: Accommodation Supplement Disability Allowance 1.87 Child Disability Allowance 0.82 Child Care Subsidy 0.74 Tier 2 subtotal Tier 3: Employment Interventions 0.20 Hardship Assistance: Non-recoverable 3.79 Tier 3 subtotal 3.99 Other components: MSD Expenses 6.82 Net loans cost 0.45 Other components subtotal 7.26 Grand total Taylor Fry Pty Ltd 26

27 Cashflows Taylor Fry Pty Ltd 27

28 Economic assumptions: sensitivity Liability Change ($'B) Change (%) Base Scenario 78.1 Unemployment rate +1% % Unemployment -1% % Inflation +1% % Inflation -1% % Discount Rate + 1% % Discount Rate - 1% % March 2012 Economic Factors % Taylor Fry Pty Ltd 28

29 What next for the valuation? This base-line valuation can be used to set framework for monitoring Monitor experience against projections Monitoring helps to understand financial impact of changes, particularly due to: Policy Reforms Operational changes Behavioural changes Economic impacts Each new annual valuation resets monitoring framework Build up time series to gain insight into client behaviour Further analysis of liability for specific client groups to inform operational responses Taylor Fry Pty Ltd 29

30 4) DELIVERING THE IA Taylor Fry Pty Ltd 30

31 Getting better client outcomes from MSD s investments Taylor Fry Pty Ltd 31

32 Re-focusing with a long-term perspective More focus on active engagement with sole parents through Welfare Reform from October Unemployment Benefit only 5%of liability but currently most of Work & Income s investment More focus on active engagement with people managing health conditions and disabilities from July Taylor Fry Pty Ltd 32

33 Taking a life-time view, and investing up-front Youth focus makes sense; almost $1B for just 4000 clients Taylor Fry Pty Ltd 33

34 Working actively with longer-term clients The JSS 1 year + group comprise ~15% of the liability i.e. $11½B Duration Band Number in band % population 1 Avg liability 2 % of total liability Not on DPB/IB/UB/SB 282,000 42% 38,000 18% On for < 1 year 135,000 20% 95,000 22% On for 1-3 years 113,000 17% 115,000 22% On for 3-5 years 47,000 7% 137,000 11% On for 5+ years 98,000 15% 151,000 26% Total 675, % 86, % 59% Key Result Area: Reducing Long-term Welfare Dependency We will reduce the number of people receiving the new Jobseeker Support for more than 12 months by 30 per cent from 78,000 to 55,000 by 2017 Valuation can be used to understand how progress in reaching target reduces liability Taylor Fry Pty Ltd 1. Figures may not add due to rounding For key Tier 1 benefits and accommodation supplement and disability allowance. Excludes other benefits and assistance.

35 5) RESULTS: DETAIL Taylor Fry Pty Ltd 35

36 UB Future Focus (12 month assessment, Sep-10) Estimating past impacts of policy and operational change. 15% Taylor Fry Pty Ltd 36

37 Actual probability of remaining on benefit Probability of remaining on benefit Benefit quarter DPB IB SB UB Taylor Fry Pty Ltd 37

38 P(remaining in UB), AvE by quarter Strong movement in past few years (GFC), with uncertain economy likely causing current highs Highest churn rate: >20% each quarter This prob. highly dependent on UE rate 75% move to NOB, with significant numbers to SB/OTH Taylor Fry Pty Ltd 38

39 P(remaining in SB), AvE by quarter High churn rate - >15% each quarter Strong movement in past few years, with uncertain economy likely causing current highs Weak cor with UE rate 50% move to NOB, with significant numbers to all other benefits Taylor Fry Pty Ltd 39

40 P(remaining in DPB), AvE by quarter ~7% DPB clients move off each quarter, with spike down each Q1 Positive cor with UE rate (more likely to stay on if UB high) More clients moving off here, largely to the Other category. Reversed with increased UE Taylor Fry Pty Ltd 40

41 P(remaining in IB), AvE by quarter 75% of clients moving off move to no other benefit (presumably death or work, model allows for moving to super at age 65) Just 2% to 3% of IB clients move off each quarter, Positive cor with UE rate (more likely to stay on if UE high) Taylor Fry Pty Ltd 41

42 Segmented results The main projection gives breakdowns of liability by Age (at valuation date or future payment date) Benefit type Payment date Additionally, the projection can be run on specific cohorts to give further insights, such as: Liability for clients starting on a given benefit Duration on current benefit Taylor Fry Pty Ltd 42

43 Liability estimate, inflated and discounted ($b) Age breakdown Expenses Tier 3 Other T2 AS Other T1 UE SIC IB DPB Age at valuation date Taylor Fry Pty Ltd 43

44 Payment year breakdown current liability Taylor Fry Pty Ltd 44

45 One person projections It is possible to run the projections on a single person, specifying their Age Current benefit (including not on benefit) Time on current benefit (duration) Benefit history This can give considerable insight into how the liability is allocated to different scenarios Taylor Fry Pty Ltd 45

46 Starting benefit: Impacts client behaviour & liability Starting on UB On UB for 1 year, first ever benefit, age 35 Liability: Behaviour: Benefit Main AS DA Total $000 $000 $000 $000 UB DPB IB SB Total SB IB DPB UB Taylor Fry Pty Ltd 46

47 Liability & behaviour: Varies by starting benefit DPB (start with 1 child age 0) IB SB UB SB IB Benefit Main AS DA Total $000 $000 $000 $000 UEB DPB INV SIC Total Benefit Main AS DA Total $000 $000 $000 $000 UEB DPB INV SIC Total Benefit Main AS DA Total $000 $000 $000 $000 UEB DPB INV SIC Total Taylor Fry Pty Ltd 47

48 Discussion Taylor Fry Pty Ltd 48